The government is contemplating a move to raise the investment cap for the foreign institutional investors (FII) in the government securities market. The move is aimed at promoting the demand for government paper and ensuring that the sovereign borrowings do not crowd out the private demand.
Presently, FII investment in government securities is capped at $6.5 billion while they can invest up to $15 billion in the corporate debt segment. Since the FIIs are close to exhausting their investment limits in gilt securities, the government feels that by raising the cap it can ensure that more money pours into the system, thus releasing the pressure on interest rates.
The government is currently running a record deficit of 6.8%, highest since the country embarked upon the road of liberalisation in early 1990s. This has forced the government to borrow a huge amount at Rs 4.51 lakh crore, or nearly 40% of its total expenditure.
Many economists as well as industry bodies had expressed apprehensions that the huge level of sovereign borrowings may push up the rates as the corporate sector and the government compete for same funds, thus pushing up the rate of interest and lowering the level of induced investment. The government has been assuring industry that it will avoid any such eventuality and in the same spirit it may allow FIIs to buy greater amount of sovereign debt which will help lower pressure from the rates.
The Centre has already clarified that it will keep the borrowings frontloaded as it expects the corporate credit demand to pick up by Sept-Oct. In the revised borrowings schedule released by the government, it has put the total borrowings for the first half of fiscal at Rs 2.99 lakh crore or nearly two-thirds of total borrowings.